Q2 2021 Marketaxess Holdings Inc Earnings Call
Ladies and gentlemen, please stand by your conference call will begin momentarily once again, ladies and gentlemen, thank you for your patience and placed on bi.
[music].
Ladies and gentlemen, thank you for standing by at this time all participants are in a listen only mode. Later, we will conduct a question and answer session at that time. If you have a question question simply press Star then the number 1 on your telephone keypad. If you would like to withdraw your question press the pound key at any time.
And Minder. This conference is being recorded on July 21st 2021, I would now like to turn the call over to Dave Cresci Investor Relations manager at markets access. Please go ahead.
Good morning, and welcome to the market access and second quarter 2021 conference call.
For the call and Rick Mcvey, Chairman and Chief Executive Officer will review the highlights for the quarter Christy.
Chris Concannon, President and COO will discuss automation and product expansion and then Tony to Lee Chief Financial Officer will review the financial results.
Before I turn the call over to Rick Let me remind you that today's call may include forward looking statements.
These statements represent the company's belief regarding future events that by their nature are uncertain.
Actual results and financial condition may differ materially from what is indicated in those forward looking statements for a discussion on some of the risks and factors that could affect the company's future results.
Please see the description of risk factors and our annual report on form 10-K for the year ended December 31.2020.
I would also direct you to read the forward looking statement disclaimer and our quarterly earnings release, which was issued earlier. This morning is now available on our website now let me turn the call over to rich.
Good morning, and thank you for joining us to review our second quarter results.
Quiet market conditions, and global credit markets led to a soft quarter with revenue of $176 million.
Down 5%.
Operating income was $87 million and operating margin was 49%.
Diluted EPS of $1.77.
Down 20% year over year.
Year over year comparisons were challenging when looking at Q2 last year, when our revenue was up 47% and EPS was up 73%.
However, 2 year compound annual growth rates show strong revenue growth of 19% and operating income growth of 20% this quarter versus the second quarter of 2019, consistent with our long term growth rates.
Market share levels, this quarter and high grade and high yield were similar to last year.
FINRA has also announced that they will revise our historical trace market volumes on July 26th to adjust for the rapid increase and double counting for fixed income Etfs volume.
We will revisit our market share estimates once we see the adjustments from FINRA.
We continue to add active clients to our network and for the quarter, We set new records with 1840 firms active globally.
Emerging markets growth was a highlight for the quarter with volume up 11% year over year, while total EBITDA market volumes were down and estimated 17%.
Our estimated EBITDA market share set new highs for the quarter.
We are encouraged by the ongoing progress and municipal bond trading with record volume during the quarter.
International clients represented 32% of our global volume and the second quarter, a new record for geographic client diversification.
Earlier this week, we announced that Charles Li.
The former Chief executive of the Hong Kong exchanges and clearing limited has joined the market access board of directors Charles brings extensive experience and market structure exchanges and electronic trading and will add important experience to our board, especially in the Asia region.
Slide 4 provides an update on market conditions.
Subdued market conditions led to much lower credit market volumes and the second quarter.
Institutional investors reported lower fixed income trading activity and ETF market participants were much quieter than normal, especially in high yield.
For the quarter high grade corporate bond indices were locked in and 8 basis point trading range. Following a range of 138 basis points 1 year ago.
Trade high grade volume was down 20% and trade high yield volume down 14% versus last year.
Fixed income ETF share trading was down 31% in the second quarter versus last year.
The lower left chart shows the normal deviations and high grade and high yield share gains versus a multiyear linear regression.
We have been through quiet trading periods before and fully expect a mean reversion for market volatility and trading volumes.
We remain optimistic that the increase and fixed income trading automation and all to all trading will lead to an increase in trading velocity.
Treasury yields ticked up during the second quarter, but has since moved lower once again trade.
Treasury yields impact corporate bond duration and also our high grade fee capture.
Slide 5 provides an update on open trading.
Our unique open trading liquidity pool continues to drive important transaction cost savings to our clients in spite and low volatility environment.
Client saved an estimated $127 million in transaction costs during the quarter due to price improvements and open trading.
The vast majority of investor and dealer initiated orders on market access are available in 1 single liquidity pool.
And on average our network delivered 29000 orders per day, and over $15 billion and notional value into the open trading central marketplace.
We believe that our unique global institutional network with over 1800 active firms and open trading volume increases trading opportunities and reduces transaction costs and reduces market risk during high volatility periods.
Our dealer initiated open trading volume was up 28% year over year.
Dealers are finding great value and both making markets and taking liquidity on the market access system.
<unk> client segment is moving rapidly to embrace electronic trading solutions.
We are also pleased with the early success and our diversity dealer initiative. We have now on boarded 12 minority and women owned dealers for the new program and diversity dealer volume with investors is up 90% year over year and early days.
And this is a great example of using open trading to expand important trading relationships for investors and dealers.
Now, let me turn the call over to Chris to provide and update on new products and trading automation.
Thanks, Rick Slide 6 provides an update on our investment and new products and protocols, we recently announced enhancements to our portfolio trading solution, including integrating integrated net spotting and hedging capabilities supported through the market access rates platform.
Since the technology release in late May more than 95 portfolio trades had been completed on market access with 27 unique investor firms and 10 dealers while portfolio trading makes up a small portion of the market somewhere between 4 and 5% of trades. We are committed to further enhancing our portfolio trading.
<unk>.
Our mid ex sessions protocol was launched in the fall of 2020 and has seen significant adoption $2.5 billion and eurobond volume was traded through mid <unk> and the second quarter up 79% from the prior quarter, we expect to extend mid X 2 U S credit products and the second half of this year shifting focus.
New product areas municipal bond trading on market access grew to a record $6.8 billion and the quarter also within the quarter, We announced the completed acquisition of Muni brokers, which transact approximately $330 million and municipal bond volume per day, which is currently not included in our Muni bond volume.
<unk> our market access rates offering is expanding beyond our initial click to trade solution with <unk> being launched this month and our all to all open trading functionality for treasuries launching later this year, we continue to deliver our clients with a choice of trading protocols across the full breadth of fixed income products.
Supported by a combination of dealer and all to all liquidity.
Slide 7 demonstrates our continued momentum of automation and credit trading automated trading on market access reached new records in the quarter growing to $41.5 billion and volume and over 218000 trades and 98 firms leveraged our automated trading protocols and the quarter up.
86 per year today auto ex represents 17% of total trade count and 6% of our total volume.
The use of dealer algorithms is continuing to grow on the platform with approximately $4.6 million algo responses and the second quarter up 30% from the same period last year. We have also seen continued adoption of our auto responder functionality auto responder allows client firms to automatically respond.
And with liquidity based on a set of predefined criteria. This functionality is a critical step in helping clients avoid the cost of regularly crossing and the spread.
Slide 8 provides a summary of our trading volume across product categories. Our U S high grade volumes were down 22% year over year to 324 billion for the quarter, largely due to significant decline and market volumes and benign market conditions and the second quarter estimated U S high grade trade.
Market volumes were down 616% year over year.
Volumes and our other credit category were up 5% year over year to 345 billion for the quarter, our trading volume and emerging market bonds and euro bonds outpaced the change and estimated market volumes similar to U S high grade the most significant factor weighing on.
The decline and our U S high yield trading volume was the double digit decline and estimated market volumes are.
Our green bond trading initiatives continues to support clients ESG related investment mandates and the second quarter over $13 billion worth of Green bonds for traded on our platform, resulting in over 65000 trees being planted we have now planted over 131000 trees since the beginning of the year.
Which nearly surpasses our 2020 full year record now let me turn the call over to Tony to provide and update on our financials.
Thank you Chris on slide 9 and to provide a summary of our quarterly earnings performance revenue was $176 million down 5% year over year.
Commissions were 9% lower resulting from the 10% decline and credit trading volume.
Post trade services revenue more than doubled to $9.8 million and reflects $3.8 million of trade reporting revenue from clients added through the regulatory reporting of acquisition and healthy organic growth driven by new clients and new services infill.
Information services revenue was up 17% year over year, principally due to repair and data sales.
A weaker dollar favorably impacted both post trade and information services revenue each by around $600000.
Operating income was $87 million down 16% year over year and operating margin was 49, 4% and the second quarter.
If we excluded the impact of the acquisition related intangible amortization expense and nonrecurring integration costs operating margin would have been 52%.
Despite weaker market volumes and difficult market conditions, we continue to add personnel and investing in organic and inorganic initiatives.
The effective tax rate was 21, 4% on a year to date basis.
We expect the effective tax rate to vary quarter to quarter and the second half of the year and are maintaining our full year effective tax rate guidance of 22% to 24%.
On slide 10, we have laid out our commission revenue trading volumes and fees per million.
On a composite basis, the majority of the 13% decrease and credit transaction fees were driven by a decline and estimated market volumes.
Lower rates transaction fees was due principally to a decline and estimated U S treasury market volumes.
U S high grade fee per million was down around 4% on both a sequential and year over year basis.
We didn't make any fee plan changes during the quarter and the sequential decrease was due to a variety of factors, including slightly lower duration.
Our other credit category fee per million dollars of $194 was lower than both the first quarter 2021, and second quarter 2020 levels due principally to the impact of the change and product mix and shift and protocols.
During the second quarter, there was a heavier weighting to emerging markets and eurobond volume and a lighter weighting to high yield and volume.
The increase and other credit distribution fees was principally due to the inclusion of muni broker subscription and license fees of $1.1 million.
And the near term, we expect these subscription and license fees will run around $1.3 million per quarter.
Slide 11 provides you with the expense detail.
Quarter expenses were up 11% year over year.
Excluding the $5.1 million of operating expenses amortization of acquired intangibles and nonrecurring integration costs related to the regulatory reporting hub and Muni brokers businesses expenses were up 4% year over year.
Sequentially expenses were down 3.1%.
Approximately half of the decline and compensation and benefits was due to lower variable incentive pay which is tied directly to operating performance and the residual was due to lower employer taxes, which are always seasonally higher in the first quarter pure salary expense was up almost $1 million versus the first quarter.
As we continue to execute against our hiring plan.
Higher depreciation and amortization reflects the amortization of acquired intangibles on the Muni brokers transaction.
Marketing and advertising cost can swing period to period and the second quarter reflects a more active level of advertising campaigns and return on <unk> expense.
We are at the midyear Mark and are now expecting net full year expenses may end up at the low end of our expense guidance range of $370 million to $386 million.
On slide 12, we provide cash flow and capital management information cash.
Cash and investments as of June 30 were $440 million and trailing 12 months free cash flow was $320 million.
During the second quarter, we paid out the quarterly cash dividend of <unk> $25 million and repurchase a total of 49000 shares at a cost of $20 million through a combination of net down and option exercised and restricted stock vesting activity and our share buyback program.
We didnt borrow against the $500 million.
Syndicated revolving credit facility for the $200 million secured facility used to facilitate open trading settlement activity and the second quarter.
Based on the second quarter results, our board has approved a 66.
<unk> quarterly dividend.
Now, let me turn the call back to Rick.
Thank you Tony we continue to be optimistic about the long term growth opportunity in front of us.
And the short run growth rates will always be impacted by market conditions.
Long term, we continue to deliver attractive revenue and earnings growth and see a large and growing opportunity set for our business.
Our investments are paying off with a growing international business accelerating share momentum in emerging markets and promising new products and protocols.
Let me close the prepared remarks with a sincere thank you to Tony to lease.
<unk> has done an outstanding job as market access CFO over the last 11 years. He has been a terrific business partner and an essential part of our senior team always operating with integrity and transparency Tony.
Tony has passed the CFO baton on to Christopher Rosa.
Our former head of finance and <unk>.
<unk> will remain with the company and focus on corporate development capital management, and Investor Relations, well done and Tony on a great run as market access CFO.
Now I would be happy to open the line for your questions.
As a reminder to ask a question you will need a question for 1 on your telephone to withdraw your question. Please prices per pound key.
First question comes from the line of Richard <unk> with Piper Sandler. Your line is open. Please go ahead.
Yes, good morning, and first congrats Tony as well.
Well well earned.
Sort of move transition.
On risk.
I guess, Rick the first question is.
Market conditions dramatically changed from the.
And the same quarter last year and.
But we have seen a little bit of volatility at least and the overall markets and I think.
Some slight volatility upticks.
And the credit Mark.
In July.
Can you give us any feel for.
How weather.
Youre seeing the same sort of.
Movement back and and a more confined.
Environment more friendly to market access.
Sure.
And.
Happy to take that question.
And just the last 3 or 4 days rich, we've seen some better volatility and it has come through and our volumes and especially in high yield share.
It's a little bit weird, which is why we really didn't comment on it because at the midway Mark in July the first half as the fourth of July holiday weekend with very low volumes on the short trading day on July 2nd So.
And with 8 trading days left that we got and make the best for the month is yet to come but youre absolutely right. If you look at just the last 3 or 4 trading days with.
And even some signs of volatility coming back and it has been beneficial for our business and.
And the place where it's most noticeable is obviously the ETF community gets engaged in.
And our high yield product in particular, when theres volatility and high yield spreads, which which we have seen more recently, so who knows whether it lasts or not but at least some positive signs on the volatility front.
Understood. That's helpful. Rick and then I guess, when we think about market access we think about the open trading and be all to all network and.
The acquisitions that you've done both.
And with liquidity hedge and Muni brokers.
I guess, Chris can you talk about you and you did mentioned that you're going to take on.
And RF Q and open trading I believe into the Treasury market.
And I think longer term, maybe it's the muni market as well.
And what gives you confidence that.
I guess for how does it how do you think it will fit this new protocol and end markets.
Haven't been on.
Accustomed to it.
Well, great question rich and.
I do have to mention that I saw you're running and Sag Harbor and.
I think our volumes are growing faster than your pace I noticed but.
On open trading.
As we think about open trading.
Open trading to really penetrate across all markets. We think it's a unique offering it brings alternative liquidity into those markets. It has a network effect of liquidity.
And it also allows clients to participate.
And avoid spread crossing and be liquidity providers.
When the moment is opportune for them. So open trading across all products is a key part of our strategy long term.
And <unk>, we see open trading is a sizable portion of the market open trading is about 45% of the volume and the Muni market.
So it's actually an important component to the muni market and that network effect, obviously the acquisition of Muni brokers, we intend to populate our open trading content with Muni brokers data so the linkage with.
Many brokers will come through open trading as well again, leveraging that open trading solution in the rates market. It's it's a really unique opportunity that we see and 1 that actually the fed sees as well and recently published a report a study on on last year's challenges and the treasury market.
So our strategy is to deploy our open trading solution in the Treasury market, we plan to deliver that before year end and.
And have a very nice plan around not only our Q, but open trading as well and another key attribute of our open trading solution will be across the full breadth of treasury products, both on the run and off the run which allows unique a.
A unique product offering and in treasuries that we don't see and the market today. So all of that's coming.
And as I mentioned open trading.
And things like Euro bonds and continues to see sizable growth even in a more challenging quarter that we just witnessed.
Okay got it very helpful. And you are welcome to join me anytime for run their big Guy.
[laughter] I think I might outpace your sorry next question.
Our next question comes from the line of Patrick O'shaughnessy with Raymond James Your line is open. Please go ahead.
Hey, good morning.
Why do you think that market access as U S credit market share it seems to be more impacted by market volatility more so than your competitors.
Yes happy to take that 1.
Patrick and I do think that.
<unk>.
Different protocols work best and different environments, and you saw us thrive during the high volatility period a year ago.
And when price dispersion in credit was much higher than it is currently and as a result, the additive with liquidity of open trading.
And the price improvement from open trading was very significant to market participants and drove volumes and share through our.
Platform in an environment like this where there is very limited volatility there's less price dispersion.
What we are hearing from institutional investors right now is there's actually a shortage of bonds because there's so much liquidity and the system and as low as our rates our rates are even lower elsewhere in the world. So asset managers are getting inflows and that increases the focus on the new issue calendar and dry.
And some business back at the margin to dealers.
The other point that I made earlier Patrick that you are well aware of is we have introduced a lot of new market participants to credit trading through open trading day.
ETF Arb community is very active windfall is high.
And much less active with ball at low levels as they have been recently and when you look at our high yield share difference, it's almost entirely driven.
By the swing and ETF market participants not because they've gone anywhere else.
Or they don't want to trade it just that the arbitrage opportunity.
It has been much less and as a result there.
And there are levels and their share of trace are down significantly.
And I do continue to believe as Chris mentioned that our open trading solution is differentiated.
It will do well when the volatility is high and a lot of the success that you see away from US is really dealer directed protocols. We're really pleased with our most recent release on portfolio trading and we would admit that we were behind there, but we think we have closed the gap Inc.
Very early days and electronic trading and portfolio trading and portfolio trading and in general we're getting great encouragement from investors and dealers to keep going because none of the solutions and the market are perfect.
But that was 1 of the share gaps that we had that were working very hard to close and have a series of releases and enhancements coming up and I think 1 to 1 to watch there and.
And then finally.
And <unk> trading and has not really been a strength and market access we focus on that $75 and 80% of the market that's driven by institutional investors.
So as dealers have embraced electronic solutions some of our competitors that have.
Dealer to dealer businesses and voice brokers are benefiting from that transition and the short run slightly more than we are but we're encouraged that we're participating in it through dealer RF Q into open trading.
So I think it's a variety of factors but.
And quite confident that the advantages of open trading income through longer term and when we get back to more normal levels of volatility.
Got it that's helpful context. Thank you.
And then you spoke about a lot of the new initiatives that you have underway, whether it's portfolio trading.
Or what markets are mid ask what's the nature of your client sales efforts efforts. These days.
Some of your clients starting to get back on the office and Youre doing in person meetings and walking them through this new protocols are how are your clients sales efforts taking place right now.
Good question.
We have actually been seeing clients outside the office for many months now.
And so as things opened up in Europe and in the U S.
And engagement engagement outside the office became a regular technique of our sales team.
Virtual sales is also quite effective, particularly when you're launching things like automation products that need demos and sampling of data and so our sales force has really <unk>.
Stepped up and during the pandemic and and throughout the last few months and selling virtually and and.
And doing demos and things like portfolio trading demos and log market demos and if you look at the numbers across our various products for muni bonds to M to euro bonds.
And the sizable growth year over year to what it was a very difficult comp.
Last year, so we feel quite comfortable in the virtual arena, but we have actually started to see clients outside their offices and.
It's still not engaging clients in their offices and we expect that to continue throughout 2021.
Thank you.
Thank you and our next question comes from the line of Dan Fannon with Jefferies. Your line is open. Please go ahead.
Thanks, Good morning, Tony I wanted to follow up on your comments around low end of the guidance kind of where youre tracking today and maybe give us.
And what that means for the revenue environment with a backdrop as you think about the back half of the year in terms of industry volumes.
Sure happy to do that Dan and.
Looking at the.
Looking at the full year forecast right now there is there are some variables and that forecast.
1 of them is around.
People and.
We ended the quarter with right around 640 people.
And we expect to add and have clear line of sight on.
And on adding another 40 people, albeit 25 of those are our college Grad program, but another big swing factor has to do with variable compensation a lot of that is tied to tied to operating performance and and at least right now and what we've got built into the model is more of a continuation of what we saw on the first half of the year.
Year, which are fairly muted.
Market volumes and fairly muted market conditions, so that variable compensation can swing up or down depending on operating performance.
The other piece of the expenses that that does fluctuate and again tied to.
Market volumes and market conditions would be around clearing expenses and.
And you saw the savings that came through this year largely as a result of.
Our our self clearing transition activities and the U K and our settlement agent transition activities I'm, sorry on the U S and and the settlement agent transition and the U K.
Depending on market conditions and market volumes that those clearing costs can swing up or down as well so hard to predict right now.
We're assuming a continuation of what we've seen and the first half of the year.
Great. That's helpful. And then just thinking about the opportunity with post trade as you kind of integrate the acquisition as well as the other kind of non transactional revenue line items, just kind of hoping to get a bit of and outlook here for the remainder of the year for those segments as well.
Yes, happy to do that and and really the non transaction will be around post trade and on.
The information services side and.
And the first half of the year on on on post trade and you did see a big a big pickup because of the integration of the regulatory reporting hub business, it's about $8 million and revenue and the first half of the year.
More than meeting our expectations in terms of and <unk>.
A revenue contribution we've also seen a pretty big pretty big increase and inorganic revenue, we have new services in the past 12 months around S. FTR reporting and repo matching theres new client additions as a couple of firms that have exited the transaction reporting market when we look at back half.
Half of the year for for for post trade.
And pretty good proxy would be what you've seen and the first half of the year and what that would translate to would be 30% plus growth on the organic side and then overlaid the Reg reporting upside so.
So back half of the year similar although I will tell you something and post trade. It is.
Our transaction reporting revenue is somewhat tied to volume. So there is that there are tiered volume plans. So so volume does matter, but but you used the first half is a pretty good proxy there.
On the on the information services side, if you look at the first half of the year and revenue was up about 11%. The really good underlying news there when you look at recurring revenue it was up around 19%. So any given quarter. We may have some onetime 1 off sales they were much bigger and 2020.
And what we're seeing here in 2021, so when you really.
Carbon to the to the information services revenue, 19% growth.
Year over year and recurring revenue.
Guidance for the rest of the year.
If you look back historically and we've talked about this and the past we've grown information services revenue.
Low double digits, we've got a pretty decent pipeline of opportunities looking into the second half of the year and we're looking at looking at sort of forecast around that and we're looking at double digit growth year over year on the information services side. So a continuation of what you saw on the first half.
Thank you.
Thank you and our next question comes from the line of Kyle Voigt with BW. Your line is open. Please go ahead.
Hi, good morning.
And maybe my first question on portfolio trading.
As you alluded to earlier, a protocol that and maybe you hadn't and investing as much as peers historically.
Rick I'm curious to hear your updated thoughts on the role that portfolio and trading will play and the long term electron vacation of the credit market and maybe how this compares to your thoughts just to just a few years ago.
Yes.
And <unk>.
I think it's a new tool and risk transfer that.
And has value and certain situations for both investors and dealers.
Chris mentioned, we think it's around 4% of trade volume now.
That's up from probably 2.5 per centers. So a year ago, we do believe it's situational right. So.
And I don't think youre going to see this become.
Something more than 8 or 10% of the market over time, but.
There are good results and certain situations and certain kind of basket trades that.
And that investors are reporting so it's really important for us to continue our work around.
Enhancing the protocols for clients and.
And as I mentioned, we're off to a really good start.
And do see some indexation and balancing going on in portfolios currently you see.
Some tax trade going on and tax swaps going on there.
Usually go to somewhere between 1 and 3 dealers right now. So this is part of the dealer directed bid.
Business that I talked about earlier.
So it's all part of what I think is the transformation of the market, making model and risk transfer model. This is a new tool and that and the shed that investors and dealers are using and we're really pleased to be now part of that.
Ecosystem and expect to invest even more heavily in the future I will also say that.
And that the use of portfolio trading will ebb and flow with volatility.
It's much easier to conduct basket trades when volatility is low and that again as you. If you look at the second quarter of last year.
And with pricing moving around as much as it was it's more difficult to do basket trades that require more time.
In constructing the basket and negotiating the price for the basket and I will also say.
And I look at what we're doing and others. It's it's trade assist and trade processing the STP benefits and my mind are the key piece because of the number of transactions. It's today, it's a pure client to a limited number of dealers protocol.
So it's not a liquidity solution currently.
But that is subject to change to as people think about different ways that they might execute portfolio trades down the road.
And 1 thing I'll add is we made a very strategic decision to focus on diversity dealer initiatives something that is unique to market access and quite powerful and the current environment and we're seeing high demand from clients.
To execute with our diversity dealer initiative portfolio trading has natural limit to it in a marketplace like the fixed income market, both from the liquidity provision side and risk transfer as well as from the client side and part of our enhancements to portfolio.
<unk> is to make sure clients understand the value of trading as a portfolio versus the value is trading and the individual line item less we offer both solutions both portfolio all of our non offerings as well as lists and the pricing dynamic can change as Rick mentioned from quarter to quarter.
And so while it is a sizable portion of the market at 4.5%.
We do think it has growth limits to it.
And we will change as a percentage during a certain market environments.
That's great. Thank you.
And my follow up would actually be on on mid X.
It looks like it's about 3% I think of your eurobond volume already.
I think it was just launched less than a year ago. So.
Pretty good success, thus far but I guess, when you think about the rollout to U S corporates.
I recall, the liquidity characteristics characteristics of the U S high grade market being pretty similar to the eurobond market, but just wondering if there's anything you can point to that would really lead you to believe that.
The U S rollout would see more or less uptake and then what you saw with with the Euro bond launch.
Well, yes, as I mentioned in my remarks, we plan on rolling out <unk> to U S. Corporates. We are excited about the success in Europe, and we do see similarities and in demand and in the U S. It is much more on demand for from dealers than clients.
And it's really a dealer to dealer solution and many times you will see.
Ah sessions trade come off of a portfolio trade. So some of those bonds that are trading and portfolios. The dealers don't want and inventory will find their way into a mid XO assertion.
Assertion trade as well so we do see a sizeable matches happening in our eurobond mid <unk> solution, and we would expect similar and maybe even larger sizes matching and our <unk> solution as it rolls out and U S corporates, but we do see client demand, we do see dealer demand and.
And we're really seeing huge growth and our and our dealer our Q solution and this would be another really dealer to dealer offering in the U S.
Great. Thank you.
Thank you and our next question comes from the line of Chris Allen with Compass Point. Your line is open. Please go ahead.
Yes, good morning, guys.
Maybe if you could just touch on emerging markets, a little bit maybe give us an update in terms of where you're seeing strength from a regional perspective, where there's penetration opportunities and is there any.
Change to the competitive landscape for electronic trading perspective.
Yes.
It was hard it was a little bit hard to hear you Chris but.
I think the question was about the competitive landscape and.
Growth what are you seeing so yes so.
Net.
On the competitive landscape.
And it's.
It's primarily internationally with Bloomberg.
Because of their desktop presence and.
We are quicker.
Quickly, adding new clients in APAC, EMEA and Latin America. So.
We're on boarding clients and we think we have a superior electronic trading and liquidity solution that we are promoting around the world and so.
So we're really excited about the market share gains and the momentum that we have on volume and importantly, the active clients.
And that we see internationally and there is so much runway left there because.
And it's not just 1 market where trading hard currency and bonds.
Bonds and all regions, but importantly, we're trading and.
<unk> and 'twenty, 6 local markets and local currencies too.
So there is a massive long term opportunity there and.
The progress that we've made and the first half of the year is coming and both hard currency and local markets and it's coming and all regions.
So this has really held up the international.
Business results and the first half of the year, even though <unk> markets in general are suffering from the same lack of volatility.
And that you see and U S credit markets.
So a space to watch where we're really excited about the size of the opportunity and the growing competitive position and market share that we have and we've got so much more to do APAC is not only and is the underlying market growing very quickly, but our own.
Volume and client base and market share is growing quite accurately too.
Great. That's it for me thank you.
Thank you and our next question comes from the line of Alex.
<unk> with Goldman Sachs. Your line is open. Please go ahead.
Great. Thanks for taking the question good morning, everybody.
I was hoping to take a little bit of a step back and maybe thinking cross the U S E landscape and thinking.
And market access and other platforms. It looks like the percentage of electronically traded is pushing something and that 40 ish percent range give or take at least over the last couple of months.
Can you update us on your latest thoughts about sort of the ultimate penetration opportunity for electronic platforms here.
And 8100 kind of how do you guys think about that what is the growth path looks like to get you. There I E. Like what are the key kind of customer pinpoints.
And can you need to solve to drive that share higher.
And then I guess secondly.
So on a same lines of question, but.
And what do you guys think it'll take to see actually higher turnover and AG space.
Feels like that's been again other than periods of elevated volatility it's been pretty muted.
Yes.
And I take it.
Our first shot at that Alex. Thank you for the question but.
The first disclaimer as that.
And the estimate you see are just that their estimates provided by venues that have wildly different reporting standards.
And so.
I think there are some analysts that are trying to parse through all the reporting differences.
To get through the differences around double counting fully electronic versus electronic for processed and segment reporting across <unk> and EBIT all to all so there are very different standards, and it's really hard to get to it.
And accurate answer on what the share is today because of those differences.
And is something that you know <unk> took off as a recommendation that we should have standard so that it's easier for people to follow.
And the share trains.
Trends and electronic trading, which I believe had something to do with FINRA at least addressing some of the double accounting issues that you are aware of that have been showing up in ats that are probably part of that 40% number that you're citing.
But.
Having said that I do think that we're going to see the benefits and higher share of electronic trading.
And for investment grade I don't see a reason why we wouldn't be thinking 60%, 70% of the market down the road and an increase and velocity and.
And every other market when you have.
Our central marketplaces like ours that are connecting all participants and 1 central liquidity pool and growing use of trading automation and that's reducing trading costs.
You do get and increase in velocity and.
And absent the second quarter, we've gone on a really nice uptrend over the last for 5 quarters on trading velocity and that's actually probably the bigger opportunity.
Because velocity came down and following bank regulatory reform and the constraints on bank trading and balance sheets.
Now starting to go back up because the dealers have transformed their market, making models, they're getting and the middle of more trades than ever before and investors are using automated tools like <unk> and auto are more regularly too. So when we think out 510 years Alex.
The share gains are part of the story, but velocity and equal or potentially even greater part of the story. If you look at what has happened and velocity and other asset classes. When automation takes hold the way it looks like it's starting to and credit.
Great. That's helpful. Thanks, and then maybe specific question and I was hoping you guys can update us on liquidity.
Liquidity edge, and specifically with respect to net spotting and what youre working through there.
I jumped on coal a little bit later I'm not sure. If there was an update on that but curious how.
How that initiatives going thanks.
Sure Alex.
Ill take that 1 so.
And our rates offering is.
And is live and our click to trade solution has been rolled out and is growing and we're now over 200 clients with regard to how our rates integration with our credit trading high grade trading we do have a net spotting already on the platform clients are feeling the benefits.
And that as a result of the.
The integrated price from the rates platform, its a slightly tighter price and we're seeing on other platforms. Our net hedging is fully live it's in production and rolling out client by client. We have just over 13 dealers, providing liquidity with a number of dealers in the queue to support that auto hedge.
<unk> as well which helps the.
On the dealers on the platform auto hedging has also rolled out we have close to 17 dealers live and benefiting from auto hedging so the integration of our rates.
Platform and our credit trading platform has really really gotten to full production and we're quite comfortable with that as I mentioned in our remarks or click to trade solution is out and rolling out to clients, but we're more excited about the opportunity around our Q and open trade.
<unk>, which is coming here shortly open trading and particular across the full breadth of the treasury products.
Group.
Which will be out before year end and Thats really a unique offering that we don't see any other competitor offering and the treasury space, where both dealer liquidity and alternative dealer liquidity can be found in 1 place and.
In response to large are accused across both on the run and off the run so really excited about 2021 and the treasury space.
And here in the U S.
Great. Thank you very much.
Thank you and our next question comes from the line of Sean Morgan with Rosenblatt Securities. Your line is open. Please go ahead.
Hi, guys. Good morning, Thanks for taking my questions.
So the first question is just on capital allocation I think buybacks for a little more aggressive and the second quarter should we expect that to continue.
Through the back half of this year.
So Sean on the.
So the capital management programs, we have in place we've got we've got the 2 programs we have are.
Our recurring dividend and place where we're targeting are paying out about 1 third of our earnings and free cash flow and then we have the share buybacks and really we use share buybacks to offset dilution from from equity grants on.
Those share repurchases that come in 2 forms we've got buybacks Thunder on your board approved or board authorized plans and then we've got a net downs on restricted stock vesting and some of the stock option exercises and we use those repurchases and the in the aggregate to offset dilution and they do vary from quarter.
For the quarter, but when and when.
When you look at the <unk>.
Buyback plans. It does vary it's dependent on the on the grid and places dependent on on our share price, but youre correct and just looking at the buyback plans repurchases were higher in Q2 and and.
And the first quarter.
But we're going to continue to maintain that philosophy of using repurchases to offset dilution and.
That's why the diluted share count hasn't really varied and Latin and the last 7 years. So right now and this is both dividends and repurchases no claims no plans to change our capital return programs, we revisit the conversation with the board every quarter, but today, we feel like we have been right.
The right balance and place.
Okay, great. Thanks, and the second question I know marketing was a little more aggressive this quarter.
I'm just wondering yes, that's more regular seasonality or if this is more of a focused effort and and if so.
What are you spending on and how are you measuring the success of those investments.
And so on and on the marketing Sean It does.
It does vary from period to period and it's dependent on.
Advertising campaigns client events conferences trade shows.
Less 16 months it has been impacted by by the pandemic and and and near term around the T&D spend when you look at the at the second quarter.
Little bit of and uplift and it's again.
Tends to be episodic, but a little bit of and uplift around rats, and advertising campaigns and a little bit of a resumption of TNA for thinking about the second half of the second half of the year, we would expect that run rate to look.
To look similar to the second quarter.
Got it thanks, Tim.
Yeah.
Thank you and our next question comes from the line of Patrick O'shaughnessy with Raymond James Your line is open. Please go ahead.
Patrick and I, just thought it might be on mute.
Oh, sorry about that thanks for taking my follow up.
And we're starting to see some additional use cases for distributed ledger technology, I think we're starting to see and some repo trades.
I want to say Theres at least 1 entity trying to develop and distribute electric solution for bond trading.
What do you guys see as the opportunity there is opportunities and a threat is it even going to be relevant and I think maybe in particular and leveraged loans and the settlement process. There is.
Very lengthy and complicated and maybe there's a use case for distributed ledger and and loans.
Patrick that we've been watching.
Distributed ledger technology for a number of years now and following it closely as you mentioned there are probably appropriate places for distributed ledger to offer efficiencies.
And settlement.
The key piece of the products that we trade our centrally cleared and so when you move into a centrally cleared market distributed ledger.
And only thrive if it comes with the central guarantee of a clearing house those are the some of the key benefits of clearinghouse.
Efficiencies and so as distributed ledger steps into securitized products. There are some limited areas, where they do provide efficiencies, but unless they come with that guaranty settlement.
And then netting benefit of the guaranteed settlement it becomes challenging to see the full efficiency of distributed ledger real time settlement in liquid securities.
And is not what everyone's racing towards because of the the.
The turnover can impact turnover in the market.
Given the centralized clearing efficiencies so distributed ledger as watch we see it and a couple of instruments, where it may be more efficient it may actually be interesting and new issue markets, where it's much quicker to bring the secure share securitized product to market.
And so theres a number of applications that we see it entering but obviously, we trade highly liquid centrally cleared product and.
Right now, we don't see distributed ledger stepping into that but we will continue to watch it.
Very helpful. Thank you.
Thank you and our next question comes from the line of Michael for you, Chris with Morgan Stanley. Your line is open. Please go ahead.
Hey, good morning, Thanks for taking the question I was just hoping you could talk a little bit about the opportunity that you see on the index side, specifically around creating new fixed income and to see if maybe you could talk a little bit about some of your initiatives. There. Some of the actions you are taking and what we might see over the next couple of years for market access on that front.
A great area.
A great topic.
Our following indexation and the fixed income market quite closely obviously many of our clients.
Offer index related products either managed.
Or in the ETF form we do think there is an exciting future and indexation and fixed income.
We look at the market and the indices that are in the market and they were not originally designed for what I would call highly liquid tradable products. So we think theres, a nuc opportunity in indices across the fixed income market globally.
So start offering highly liquid index products.
We currently have several indices that we have published and are providing to the market you can see them on our website, but we do think theres a great opportunity.
In the further indexation of the market. We also see custom baskets growing and the market and custom indices that clients are and demand for so.
Some unique opportunities.
Cross the index landscape and fixed income and I will tell you I think it's very early days when we look at some of the indexation and other asset classes, particularly equities.
And so we're excited about.
The benefits of indexation, not only for the overall market and our clients, but also the benefits for our competitive landscape, we thrive in ETF volume, so as fixed income products make their way into.
Index based Etfs, and we see our business thriving and this quarter is an example of where ETF trading volume was down and that certainly impact our competitive.
Position, but very excited about the future of indexation and excited about our role and indexation and the future and.
Looking forward to new products being launched in the coming months and years.
Great. Thanks, and just maybe a quick follow up question on emerging markets certainly an area of strength for you guys and the quarter you mentioned a lot of momentum. There I was just hoping you could talk a little bit about some of the initiatives that you have and your EM business, where you see the biggest opportunity other byproducts sovereigns and a big area, but what about the opportunity set on the on the corporate side and then.
In terms of geographic regions within E M.
Yes, and it's really all of the above Michael.
We have.
Both open trading and and dealer RF queue at work.
We have been active in all 26 for the local markets and we've been adding sales resources in all the regions that I mentioned and Latin Americas, EMEA and APAC.
Onboard more clients the local market opportunity, we think is enormous.
Typically you see 75% or 80% of our local markets trade by local participants and.
Our sales effort is paying dividends, there with that with more clients and dealers being on boarded and.
As I mentioned and the APAC region is especially attractive to us.
And given the growth and that in the APAC region and we.
We certainly hope to be able to compete and participate and utilize our network to help open up the Chinese markets before too long as well so.
Couldn't be more excited about.
That opportunity and the fact that we've been making.
Investments in the and space for nearly 20 years now and we think that.
There is a real acceleration going on and E trading adoption around the world and.
I would just add and we.
We're seeing health.
Healthy growth, not only and our market and market volumes and the but our data product our CP plus offering.
And as a difficult market.
Given its not a very transparent market. So any any help to both professional traders as well as clients for.
And a strong data feed helps drive our overall offering we're seeing growth and automation as a result of that data and adoption.
And our automated tools.
We are now offering portfolio trading and the EMA as well so just a lot of healthy opportunity.
From a from both open trading automation.
And all of our protocols, but really being driven by some of the.
The valuable product offering we have and data.
Great. Thank you.
It looks like that.
And the Q&A. Thank you for joining us today, and we look forward to updating you on business trends next quarter.
I'm showing that we have no further questions at this time on and I would like to turn the conference back over to Rick Mcvey for any further remarks.
I think I already closer to call, but thanks for joining US we'll talk to you next quarter.
Ladies and gentlemen, thank you for participating you may now all disconnect everyone have a great day.
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